Hail To The Chief, Plus: Rell Stumps For Russo

Well, that was a fine farewell for former Police Chief Bryan Norwood who resigned to take the top job in Richmond, Virginia. Saying sayonara to friends at Miss Thelma’s on Fairfield Avenue the other night, Norwood had apparently parked his car in a reserved lot. After the event he discovered it missing. Gives new meaning to the cops that had his BMW towed: Bye, My Way.

Governor Jodi Rell visited Bridgeport Wednesday afternoon in an appearance with Republican State Sen. Rob Russo who was instrumental in helping officials at Lacey Manufacturing secure a $5 million state loan to save 250 jobs at the Barnum Avenue plant. Russo is working overtime trying to keep the job he won in a special election in March. Company officials thankful for the assistance greeted Rell and Russo.

Russo’s Democratic opponent Anthony Musto, the Trumbull town treasurer, has been awfully quiet, publicly at least, and it has some Democratic operatives wondering if he has the fire in his belly for this race. Guess how many press releases the Musto campaign has issued? That’s right, zero.

No positions, no issues, no statements. Nothing. Maybe that’s the game plan: keep it nice and quiet, send mailers, make phone calls and ride the Barack wave. Trouble with that is Russo, a city resident, is working day and night highlighting several accomplishments in Bridgeport alone to persuade voters to keep him in office. The candidates are scheduled to meet tonight in a forum at the North End Library.

Press releases in the congressional battle between Chris Shays and Jim Himes, however, are an exercise in statement wars. The camps issue multiple releases a day on this, that and the other thing. The Hartford Courant issued an endorsement of Shays the other day while saying nice things about Himes. In fact, the Courant editorial board decided, screw it, we’re endorsing all Connecticut incumbents in the House of Representatives.

Just 11 days left. Who’s your pony? Please excuse me now, I must tell Joe Biden to stick a rag in his mouth. Oh, I know, maybe he can use one of Sarah Palin’s $10,000 leathers.

News release from Shays

Shays Critical of Federal Regulators at Hearing

Washington, D.C. – Congressman Christopher Shays (CT-4), a senior member of the Oversight and Government Reform Committee, submitted the following opening statement at a hearing today entitled “The Financial Crisis and the Role of the Federal Regulators.” Former Federal Reserve Chairman Alan Greenspan, former Treasury Secretary John Snow, and current Securities and Exchange Commission (SEC) Chairman Christopher Cox testified about the roles and responsibilities of federal regulators in the current financial crisis.

The following is Shays’ statement:

Thank you, Mr. Chairman. After three hearings on the causes and effects of the financial crisis, it’s become clear those tasked to monitor and regulate our complex credit systems were caught flat-footed as a virulent infection in the U.S. mortgage market quickly blossomed into a crippling case of global financial paralysis.

Even at the peak of the housing boom, warning signs were flashing. But regulators either ignored the alerts or failed to grasp their ominous implications. We need to know why current safeguards proved inadequate to detect or prevent this unforeseen, but predictable, market collapse.

It would be dangerously simplistic to say the only, or even the principal, cause of this regulatory shortsightedness was “deregulation.” Keeping the Glass-Steagall Act in place might have changed the pace and shape of the current crises, but it would not have prevented it. The forces at work behind the mortgage-backed feeding frenzy would have chewed through or flowed around any Depression-era barrier.

The gerry-built network of national and global market watchdogs clearly lacked the information, coordination and agility necessary to keep pace with the blindingly complex machinations of the modern financial bazaar.

Start with monetary policy. In the waning years of the Clinton Administration, with the “dot-com” crash dragging down the economy, the Federal Reserve response was to provide easy money that kept flowing even after the marketplace regained its footing.

The resulting asset inflation irresistibly drew investors to acquire risky products they didn’t understand, and lured homeowners and home buyers into mortgages they couldn’t afford. Easy money spawned dumb lending and dumb borrowing, and huge growth with little real capital to back it up.

In that environment, sharp players in high finance were able to exploit regulatory gaps, blind spots and at times an unwarranted faith by regulators in the ability and willingness of market actors to restrain or police themselves. That seemed particularly true at the Security and Exchange Commission (SEC), no matter who was in charge or what party held the White House.

In April 2004, the SEC relaxed capital ratio requirements for broker-dealers with assets greater than $5 billion – inclusive of Morgan Stanley, Bear Stearns, Merrill Lynch, Lehman Brothers, and Goldman Sachs – allowing lower reserves against possible losses. That change freed these five banks to shift billions of dollars into new, exotic and unproven investments like mortgage backed securities.

Leverage ratios- the multiple of debt to capital – ballooned from the teens to well above thirty. The SEC answered critics of this high-wire leverage strategy by pointing out it was only available to large firms. But that only guaranteed large losses when the fall came.

The SEC also appears to have outsourced oversight to those with the least incentive to blow the whistle on excessive risk – the companies themselves. Part of the deal in 2004 was supposed to give the agency greater visibility of bank and holding company balance sheets. But the Commission never took advantage of this wider window into the shadowy world of risky assets and high leverage. Over the past eighteen months, as financial storm clouds gathered ominously, the SEC did not complete a single inspection.

Stronger capital reserve requirements and lower leverage spreads may not have prevented the current crisis, but there’s little doubt more prudent SEC actions and more aggressive SEC oversight would have reduced the massive losses for which the American taxpayers are now on the hook.

But the SEC was not alone in enabling and accelerating the meltdown. The Commission did try to regulate one of the most hazardous new elements of the mortgage-backed boom: credit default swaps. In 2000, the Republican Congress and the Democratic President agreed to exempt the swaps from SEC purview. Meant as insurance against risk, the off-book swap contracts actually compounded risks when underlying subprime assets all lost value at once.

The head of the Commodities Futures Trading Commission at the time warned that undisclosed, unregulated credit default swaps posed a grave threat to financial safety and soundness. She was shouted down by the old bulls and precocious savants of Washington and Wall Street who claimed the mere mention of additional regulation unduly interfered with derivative transactions.

Had Brooksley Born’s warning been heeded, we would not be waiting nervously to see how much of the estimated five hundred trillion dollar derivatives pile will implode, and who else will get sucked into the vortex.

A reformed regulatory structure equal to the task of unraveling this crisis and preventing the next will nurture productive capital flows and foster innovation. Government needs to be far more vigilant about understanding and managing systemic risks.

The “too big to fail” rule should be repealed and private greed on a grand scale should not merit public rescue. High risk ventures that threaten systemic integrity need to be fully capitalized by their private sponsors or prohibited altogether. No one has the right to juggle knives on a public bus.